Test Questions with Answers
Chapter 19. Markets and the Government III.
Taxation and the Redistribution of Income
Chapter 19 ― Question 1
A person earns $30,000 a year. The zero bracket is $3,000 The tax rate for up to $20,000 is 15 percent. Thereafter it is 25 percent. What is the individual's average tax rate?
- 18,70 percent
- 16,83 percent
- 20 percent
- 20,74 percent
*B. The question is tricky. Income is $30,000 Taxable income is $27,000. Overall tax due is $5,050. This is 16,83 percent of 30,000. Remember that the average tax rate is (total taxes/total income) x 100.
Chapter 19 ― Question 2
A zero bracket makes a proportional tax progressive. True or false? Explain your answer.
* True. The flat rate tax is always higher than the average tax rate. The tax rate is not imposed on the entire income.
Chapter 19 ― Question 3
The excess burden of an indirect tax is borne by the people who cease to buy the taxed commodity. True or False? Explain your answer.
* True. The excess burden is a burden over and above the tax. It consists in a loss of total surplus. The people who cease to buy the taxed commodity no longer enjoy a consumer surplus.
Chapter 19 ― Question 4
Indirect taxes are always regressive. Explain.
* They are flat rate taxes. Rich people spend lower proportions of their incomes on taxed goods and higher proportions of their incomes on non-taxed goods like rent. They also save higher proportions of their incomes. Remember that regressive stands for declining proportions - not declining absolute amounts - of taxable incomes as incomes rise.
Chapter 19 ― Question 5
Draw the Laffer curve and explain why Laffer assumed that lower tax rates can raise tax revenues.
* When the tax system is on the right downward sloping side of the curve, lowering tax rates can increase tax revenues.
Chapter 19 ― Question 6
An income tax is progressive
- because the rich pay more taxes than the middle class
- because the tax rate declines as income rises
- because the tax rate increases as income increases
- because absolute amounts paid in taxes vary with income
*C. Answer A is not quite correct. The rich also pay higher taxes under a proportional system. D applies to all tax systems except for lump-sum taxes.
Chapter 19 ― Question 7
Some countries levy a lower VAT rate on food and baby clothing, Do you think that this is equitable? Efficient?
* Well, this practice benefits rich and poor alike, while equitable programs help to make the gap between the rich and poor people smaller. It is efficient in that it is simple. Equity frequently involves a great deal of red tape.
Chapter 19 ― Question 8
In 2006, US payroll taxes amounted to 15.3 per cent including a 2.9 percent Medicare tax. FICA is imposed on the first $94,200 of annual wages.
1) Is the US payroll tax progressive, proportional or regressive?
2). There is a mistake in question 1). Do you see it?
*1) If you answer the question for incomes up to $94,200, the tax is proportional as it is a flat-rate tax.
If you answer it for all incomes, the tax is regressive.
*2) The mistake is that the US payroll tax is not a tax. It is an insurance contribution.
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